Biotechs and dividends go together like cowboys and surfboards. You just don't see them together very often.
Many biotech companies don't generate enough earnings to pay out dividends. Of those with sufficient net income, most plow their money back into the development of new drugs or commercialization of existing products. However, a handful of biotech stocks do pay dividends. Here are the three with the biggest yields.
1. PDL BioPharma (NASDAQ:PDLI)
The biggest biotech yield of all, PDL BioPharma's 7.7% forward yield stands in a league of its own. And the current yield is actually less than the company's levels in recent years. PDL only pays out 36% of its earnings as dividends, so the biotech doesn't even break a sweat when rewarding shareholders.
PDL BioPharma shares are up around 10% year-to-date. With nice dividend payments coming out each quarter in addition to the stock's increased value, it generates a pretty good overall return.
There is a big catch, though.
Most of PDL's revenue stems from drugs licensed to Roche (NASDAQOTH:RHHBY), including Avastin, Herceptin, and Lucentis. The final expiration for the patents for these products is in December 2014, although some patents expired earlier this year. There's a big question mark about the company's future after 2014. A very real possibility exists that the company won't be able to continue paying dividends at some point after 2014 -- and the stock price could plunge as revenue diminishes.
2. Questcor Pharmaceuticals (NASDAQ:QCOR)
Questcor just announced a 20% increase in dividend payouts, bringing its yield up to 2%. The biotech only initiated its dividend a little over a year ago, so that hefty bump is encouraging. Questcor boasts a very low payout ratio of only 18%.
Investors who buy Questcor should be prepared for considerable volatility, however. The stock has undergone wild swings in recent years. Much of this volatility has stemmed from questions about ongoing reimbursement for Acthar, Questcor's primary product. So far, though, there haven't been any significant reimbursement issues to derail the company's rapid growth.
This year is proving to be a great one for Questcor, with shares more than doubling. The company expanded its marketing of Acthar to the rheumatology market, which has proven to be a tremendous success. Questcor is now moving into the pulmonology area, and has its eye on other new markets as well.
3. Amgen (NASDAQ:AMGN)
One of the biggest biotechs of all is also one of the few that pay a dividend. Amgen's 1.7% dividend yield isn't bad -- and looks even better considering that the company only uses 28% of earnings to cover the payout.
Amgen receives around 57% of its revenue from the Neulasta/Neupogen franchise and Enbrel. The bad news is that a biosimilar version of Neulasta/Neupogen launches next month. Amgen could see erosion of market share in the not-too-distant future. However, the biotech will be helped as it picks up more revenue from the expiration of Pfizer's North American royalty deal for Enbrel.
Although Amgen is one of the older biotechs around, it hasn't left the innovation to younger upstarts. The company claims over a dozen late-stage studies in progress, including one for promising melanoma drug talimogene laherparepvec. (Thankfully, the drug also goes by the nickname T-Vec, which rolls off the tongue much more easily.)
Attractive dividends aren't enough to warrant buying any stock. It's important for investors to make sure a company seems capable of continuing to pay out its dividends over the long run -- dividends don't mean much if a stock's value is likely to drop considerably. PDL BioPharma, for example, may experience sharp declines in its share price and have to suspend dividends if it can't replace revenue that will be lost from patents expiring.
Both Amgen and Questcor, though, appear to have what it takes to sustain success. The world of biotech will always have plenty of volatility, so these certainly aren't your father's dividend stocks. However, they could be worth keeping on your watchlist. You can also be on the lookout for any cowboys riding surfboards.
Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.